PSAs in Oil Industry, Tax System and Corruption
Albanian Fiscal Studies No. 2019/06/03
Posted: 12 Jul 2019
Date Written: June 26, 2019
Albania produced 910.000 metric of tons of crude oil in 2018 and 956,000 metric tons of crude oil in 2017, down about 5 percent compared to 2017 and about 47 percent less compared to the peak 2014 production of 1.36 million metric tons.
The oil industry produces Albania’s second largest exports and employs more than 3,000 people.
According to official data the total investment in the research and exploration of oil and gas at least in last year’s accounts up to€1.25 billion, where the 1/3 of that is invested directly from Shell company, which is active in last 6 years, with adding apparent investment of €42.5 million starting from 2018 after a very positive discovery in the Shpiragu-2 oilfield.
The tax share to GDP from oil and gas extractive industry account in a variable percentage from 1.4% to 1.5%.
The government of Albania has been signed, since 2004 in total 16 total oil and gas exploration and production sharing agreements (PSA), of which 7 companies engaged in extracting crude oil in the southern part of Albania and 4 companies engaged in exploration activities.
PSAs allow government to retain ownership of its oil resources but grant the rights of exploration and production within a specified area, and for a limited period, to a private oil company or consortium (the contractor).Under the current PSA structure, the oil companies are appointed as contractors to undertake petroleum operations in a certain area, and they operate at their sole risk, at their own expense and more importantly under the control of the Albania institutions (i.e. AKBN).
Big importance in the PSAs has the fiscal system. The goal of a fiscal system from a government’s point of view is to attract investment and capture the maximum government take (as income earned without any enterprise, without any cost of production, to get the excess of rental value over and above the actual cost of production). Albania respect with correctness the existing PSAs and that Albania is paying out compensation to oil companies due to changes in the Albanian tax legislation. This means that the application of the tax laws contrary to what has been agreed upon in the PSAs does not raise addition revenue.
A serious risk is also the capacities and corruption level of the proper administration, which is the proper responsible authority to monitor the PSA implementation and performance.
The Government has taken several encouraging steps to improve oil sector governance and enhance the accountability of the sector.
Keywords: PSA, Economy, Royalty, Tax, Extractive Industry, Corruption
JEL Classification: H20, H30, H50, L95
Suggested Citation: Suggested Citation